Is evertex fabrinology (TPE:1470) Headed For Trouble?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into evertex fabrinology (TPE:1470), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on evertex fabrinology is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.03 = NT$28m ÷ (NT$1.1b - NT$139m) (Based on the trailing twelve months to September 2020).

Therefore, evertex fabrinology has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 4.0%.

See our latest analysis for evertex fabrinology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of evertex fabrinology, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at evertex fabrinology. Unfortunately the returns on capital have diminished from the 7.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect evertex fabrinology to turn into a multi-bagger.

Our Take On evertex fabrinology's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 3 warning signs for evertex fabrinology that we think you should be aware of.

While evertex fabrinology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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